Joint MSc in Electrical Engineering (JMEE)

Power System Operation and Management

Palestine Polytechnic University
Graduate Studies
Dr. Fouad Zaro
Electric Power Systems Engineering

Power Trading Subject to

Transmission Constraints
Introduction

• No longer assume that all generators and

loads are connected to the same bus
• Need to consider:
– Congestion, constraints on flows
– Losses
• Two forms of trading
– Bilateral or decentralized trading
– Pool or centralized trading

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Bilateral or decentralized trading

• Transactions involves only buyer and seller

• Agree on price, quantity and other conditions
• System operator
– Does not get involved directly in trading
– Maintains balance and security of the system
• Buys or sells limited amounts of energy to keep load
and generation in balance
• Limits the amount of power that generators can inject
at some nodes if security cannot be ensured by other
means

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Example of bilateral trading

• G1 sold 300 MW to L1
• G2 sold 200 MW to L2
• Prices are a private matter
• Quantities must be reported to system operator so it can check security

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Example of bilateral trading

• G1 sold 300 MW to L1
• G2 sold 200 MW to L2
• If capacity of corridor ≥ 500 MW → No problem
• If capacity of corridor < 500 MW → some of these
transactions may have to be curtailed
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But curtail which one?
• Could use administrative procedures
– These procedures consider:
• Firm vs. non-firm transactions
• Order in which they were registered
• Historical considerations
– Do not consider relative economic benefits
– Economically inefficient
– Let the participants themselves decide
• Participants should purchase right to use the
network when arranging a trade in energy
– Physical transmission rights
– Support actual transmission of power over a given link6
 Physical transmission rights

• G1 sold 300 MW to L1 at 30 $/MWh

• G2 sold 200 MW to L2 at 32 $/MWh
• G3 selling energy at 35 $/MWh
• L2 should not pay more than 3 $/MWh for transmission rights
• L1 should not pay more than 5 $/MWh for transmission rights

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Problems with physical rights

• Parallel paths
• Market power

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Parallel paths

Power Transfer Distribution Factors (PTDFs) for Parallel Paths

Neglecting Reactive Power Flows: Corollary of KVL

Path Flows (Neglecting Reactive Power and Losses):

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Parallel paths

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Parallel paths

400 MW transaction between B and Y

Need to buy transmission rights on all lines

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Parallel paths: 400 MW transaction between B and Y

Not possible because exceeds capacities of lines 1-2 and 2-3

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Counter-flows: 200 MW transaction between D and Z

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Resultant flows

The resultant flows are within the limits

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Physical rights and parallel paths

• Counter-flows create additional physical transmission

rights
• Economic efficiency requires that these rights be
considered
• Decentralized trading:
– System operator only checks overall feasibility
– Participants trade physical rights bilaterally
– Theory:
• Enough participants → market discovers optimum
– Practice:
• Complexity and amount of information involved are such that it is
unlikely that this optimum can be found in time
15
Physical rights and market power

 G3 only generator at bus B

 G3 purchases transmission rights from A to B
 G3 does not use or resell these rights
 Effectively reduces capacity from A to B
 Allows G3 to increase price at B
 “Use them or loose them” provision for transmission
rights: difficult to enforce in a timely manner 16
Centralized or Pool Trading

• Producers and consumers submit supply offers

and demand bids to a central market
• Independent system operator selects the winning
bids and offers in a way that:
– Optimally clears the market
– Respects security constraints imposed by the network
• No congestion and no losses: uniform price
• Congestion or losses: price depend on location
where generator or load is connected
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Borduria - Syldavia Interconnection

 Perfect competition within each country

 No congestion or losses within each country
• Single price for electrical energy for each country
• Price = marginal cost of production
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Borduria - Syldavia Interconnection

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Borduria - Syldavia Interconnection

Economic effect of an interconnection?

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Can Borduria supply all the demand?

• Generators in Syldavia can sell at a lower price

than generators in Borduria
• Situation is not tenable
• Not a market equilibrium 21
Market equilibrium

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Flow at the market equilibrium

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Graphical representation

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Constrained transmission

• What if the interconnection can carry only 400 MW?

• PB = 500 MW + 400 MW = 900 MW
• PS = 1500 MW - 400 MW = 1100 MW

• Price difference between the two locations

• Locational marginal pricing (LMP) or nodal pricing
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Graphical representation

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Summary

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Winners and Losers

• Winners:
– Economies of both countries
– Bordurian generators
– Syldavian consumers
• Losers
– Bordurian consumers
– Syldavian generators
• Congestion in the interconnection reduces these
benefits.

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Congestion surplus
• Consumer payments:

• Producers revenues:

• Congestion or merchandising surplus:

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Congestion surplus

• Collected by the market operator in pool trading

• Should not be kept by market operator in pool
trading because it gives a perverse incentive
• Should not be returned directly to network users
because that would blunt the economic incentive
provided by nodal pricing

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Congestion surplus

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 Pool trading in a three-bus example

Cheapest GenCos B&A:

Capacity B = 285 MW
Total Demand (MW): Capacity A = 140 MW PB=285 (max), PA=125
410 = [50+300+60] Tot Cap A+B = 425 MW Are branch limits exceeded?
= enough to meet demand
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Economic dispatch

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Superposition

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Flow with simple economic dispatch

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Overload!

Violates branch 1-2

Max Cap = 126 MW !

Branch 1-2 is overloaded

by 30 MW !

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 Correcting the economic dispatch

Find the Least-Cost Dispatch Modification that will Remove

the Branch Overload

• Suppose 1 MW of power is injected at Bus 2 and withdrawn at Bus 1:

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 Superposition

Suppose 50 MW of power is
injected at Bus 2 and
withdrawn at Bus 1: Solve by
Superposition

NOTE: 50 x 0.6 = 30
50 x 0.4 = 20

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Correcting the economic dispatch

• Alternatively, suppose 1 MW of power is injected at Bus 3 and

withdrawn at Bus 1:

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Superposition

Suppose an additional 75 MW of
power is injected at Bus 3 and
withdrawn at Bus 1: Solve by
Superposition

NOTE: 75 x 0.4 = 30
75 x 0.6 = 45

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Compare the Total Avoidable Costs Resulting from
Each of the Two Feasible Solutions:

Cost of security
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Security constrained dispatch

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Locational Marginal Prices -LMP- (Nodal prices)

• Cost of supplying an additional MW of load

without violating the security constraints

• Start from the security constrained dispatch

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Nodal prices

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Nodal prices

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Nodal prices

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Nodal price at node 2

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Nodal price at node 2

• Increase generation at node 3 AND decrease

generation at node 1

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Nodal price using superposition

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Observations

• Generators A and D are marginal generators because

they supply the next MW of load at the bus where
they are located
• Generators B and C are not marginal
• Unconstrained system: 1 marginal generator
• m constraints: m+1 marginal generators
• Prices at nodes where there is no marginal generator
are set by a linear combination of the prices at the
other nodes
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Summary for three-bus system

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Counter-intuitive flows

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Counter-intuitive prices

• Prices at nodes without a marginal generator can be

higher or lower than prices at the other nodes
• Nodal prices can even be negative!
• Predicting nodal prices requires calculations
• Strategically placed generators can control prices
• Network congestion helps generators exert market
power

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Method for computing prices

• Optimization problem:
– Objective: maximization of welfare
– Constraints: power flow equations
– Lagrange multipliers give the nodal prices
– Usually dc power flow approximation
• Optimization carried out ex-post on the basis
of the actual operation of the system

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Effect of losses on prices

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Losses between Borduria & Syldavia

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Financial Transmission Rights -FTR-

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Managing transmission risks

• Congestion and losses affect nodal prices

• Additional source of uncertainty and risk

• Market participants seek ways of avoiding risks

• Need financial instruments to deal with nodal price

risk

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Contracts for difference

• Centralized market
– Producers must sell at their nodal price
– Consumers must buy at their nodal price
• Producers and consumers are allowed to enter
into bilateral financial contracts
– Contracts for difference

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Example of contract for difference

• Contract between Borduria Power and Syldavia Steel

– Quantity: 400 MW
– Strike price: 30 $/MWh
• Other participants also trade across the
interconnection

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No congestion  market price is uniform

• Borduria Power sells 400 at 24.30  gets $9,720

• Syldavia Steel buys 400 at 24.30  pays $9,720
• Syldavia Steel pays 400 (30 - 24.30) = $2,280 to Borduria
Power
• Syldavia Steel net cost is $12,000
• Borduria power net revenue is $12,000
• They have effectively traded 400 MW at 30 $/MWh.
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 Congestion  Locational price differences

• Borduria Power sells 400 at 19.00  gets $7,600

• Syldavia Steel buys 400 at 35.00  pays $14,000
• Borduria Power expects 400 (30 -19) = $4,400 from Syldavia
Steel
• Syldavia Steel expects 400 (35 -30) = $2,000 from Borduria
Power
• Shortfall of $6,400
• Basic contracts for difference break down with nodal pricing!
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Financial Transmission Rights (FTR)
• Observations:
– shortfall in contracts for difference is equal to congestion
surplus
– Congestion surplus is collected by the system operator
• Concept:
– System operator sells financial transmission rights to users
– FTR contract for F MW between Borduria and Syldavia
entitles the owner to receive:

– Holders of FTRs are indifferent about where they trade

energy
– System operator collects exactly enough money in
congestion surplus to cover the payments to holders of
FTRs
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Example of Financial Transmission Rights

• Contract between Borduria Power and Syldavia Steel

• Quantity: 400 MW
• For delivery in Syldavia
• Strike price: 30 $/MWh
• To cover itself against location price risk, Borduria
Power purchases 400 MW of financial transmission
rights from the System Operator
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 Example of Financial Transmission Rights

• Borduria Power sells 400 at 19.00  gets $7,600

• Syldavia Steel buys 400 at 35.00  pays $14,000
• The system operator collects 400 (35 -19) = $ 6,400 in congestion
surplus
• Borduria Power collects 400 (35 -19) = $6,400 from the system
operator
• Borduria Power pays Syldavia Steel 400 (35 -30) = $2,000
• Syldavia Steel net cost is $12,000
• Borduria power net revenue is $12,000 65
Financial transmission rights (FTR)

• FTRs provide a perfect hedge against variations in nodal

prices
• Auction transmission rights for the maximum transmission
capacity of the network
– The system operator cannot sell more transmission rights than
the amount of power that it can deliver
– If it does, it will loose money!
• Proceeds of the auction help cover the investment costs of
the transmission network
• Users of FTRs must estimate the value of the rights they
buy at auction

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Financial transmission rights

• FTRs are defined from point-to-point

• No need for a direct branch connecting directly the
points between which the FTRs are defined
• FTRs automatically factor in the effect of Kirchoff’s
voltage law
• Problem:
– There are many possible point-to-point transmission rights
– Difficult to assess the value of all possible rights
– Difficult to set up a market for point-to-point transmission
rights

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Flowgate rights

• Observation:
– Typically, only a small number of branches are congested
• Concept:
– Buy transmission rights only on those lines that are
congested
– Theoretically equivalent to point-to-point rights
• Advantage:
– Fewer rights need to be traded
– More liquid market
• Difficulty:
– Identify the branches that are likely to be congested

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